Take Brexit Britain and Trump’s America. Add climate change, instability in the Middle East, cryptocurrencies, and self-driving cars… and you have the world in 2018: hopeful, yet seemingly unpredictable.

We have assembled 11 unlikely events that - if they somehow happened - have the potential to profoundly affect the world as we know it.

To assess the political, economic, financial, and social impacts, IG brought together global economic/political experts to give their perspectives and predictions.

What If

Venezuela defaults on its debt

The debt crisis in Venezuela has reached new lows amid spiralling hyperinflation and its worst recession in living memory. Venezuela has said it will attempt to restructure its debt to avoid defaulting, but sanctions have made that nearly impossible. Will it renege on its promises to investors?

Category: Economy Region: South America

Our panel of experts (interviewed March-May 2018):

Thomas Hale

Associate Professor of Global Public Policy, University of Oxford

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Dr Thomas Hale is Associate Professor of Global Public Policy and Director for China Engagement at Blavatnik School of Government, University of Oxford. He holds a PhD in Politics from Princeton University, a Masters degree in Global Politics from the London School of Economics and an AB in public policy from Princeton’s Woodrow Wilson School. Hale has published four books, most recently Beyond Gridlock and Between Interests and Law: The Politics of Transnational Commercial Disputes.

Robert Kelly

Professor of Political Science and Diplomacy, Pusan National University

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Robert Kelly is a Professor in the Department of Political Science and Diplomacy, Pusan National University in South Korea. His work focuses on international security and political economy. His areas of interest are East Asian security, US foreign policy, the Middle East, the World Bank and the International Monetary Fund. Kelly has appeared as an analyst on television news services, including the BBC and CNN.

John Kicklighter

Chief Currency Strategist, IG

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John Kicklighter is Chief Currency Strategist and head of DailyFX in New York City and San Francisco. He specialises in combining fundamental and technical analysis with money management. On his personal accounts, he trades spot currency, financial futures, commodities, stocks and options. Kicklighter holds a Finance and Investment degree from the Zicklin School of Business at Baruch College in New York City.

[ What if this happened? ]

Thomas Hale

The effect would be limited, as it is already priced into the market and into political/social expectations. It would have limited additional contagion beyond the already destabilising effect of the crisis on Colombian peace process and trafficking in the border areas. Another interesting outcome is how Venezuelan immigration to Brazil became an issue during the recent presidential campaign.

Robert Kelly

There would be a massive spike in inflation as foreigners cut off Venezuela and everything becomes more expensive.

John Kicklighter

Venezuelan assets have already reflected the fear associated with a default and since started to reflect some semblance of stabilising. A further full default would see the market treated as a full pariah, as the example that proves a full wash is possible. However, spillover to the rest of the global market would likely be contained as existing interests in the area are increasingly concentrated in full speculative outlets.

[ Likelihood ]

We asked our experts to rate how likely it is that Venezuela will default on its debt.

veryunlikely

verylikely

[ Impact ]

Panel members also rated the impact they would expect this event to have.

The Political Impact

Thomas Hale

Associate Professor of Global Public Policy, University of Oxford

One interesting effect, which is already happening, is how China is rethinking its approach to resource-rich economies. China has realised that loans backed by commodities are no safer than other kinds of loans. It is becoming more cautious in dealing with political risk and is investing more in political risk instruments, including arbitration and insurance.

Robert Kelly

Professor of Political Science and Diplomacy, Pusan National University

If Venezuela defaults on its debt, protests will pressure the government to change. But it won’t, it will repress instead. We have seen Second and Third World debt failures in the past, and the fallout can be contained. Venezuela is smallish country of low importance in the global economy. The costs of its mismanagement fall mostly on its own people. Domestically, a default would spark unrest as prices skyrocket and foreign goods disappear. Black markets and crime would expand. The real question is how the government would respond, and leftist dictators in these circumstances usually repress.

John Kicklighter

Chief Currency Strategist, IG

Venezuela would likely withdraw further from the rest of the world, creating a grey zone in South America.

The Economic Impact

Thomas Hale

Associate Professor of Global Public Policy, University of Oxford

There would be a quite small additional effect. Bond holders and vulture funds would likely bring legal and arbitration cases in an attempt to appropriate Venezuelan assets abroad. But since the market prices of the relevant assets already assume that Venezuela is going to default, and probably already is in default since it has a principal payment coming up shortly on government debt which it is unlikely to be able to pay. It is not as if it would be a surprise to anyone, or cause anyone to lose money they cannot afford to lose. There will not be any non-professional investors – no one’s pension or saving is going to be invested in Venezuelan debt – so the economic effect should be limited.

Robert Kelly

Professor of Political Science and Diplomacy, Pusan National University

There would be further contraction, further reliance on oil, shortages and capital flight. The big international effect will be a hiccup in the oil market and the circling of vulture funds.

John Kicklighter

Chief Currency Strategist, IG

The economic fallout is also difficult to make worse than it already is.

The Financial Impact

John Kicklighter

Chief Currency Strategist, IG

There would be some spillover in forex terms to neighbouring countries’ currencies, but the impact would not likely ripple further out to more liquid areas, as hedging for the high-probability event is likely already being done. The Venezuelan financial situation has played out something like a person who takes 20 seconds to trip. The stumble is obvious but the actual fall takes much longer than anticipated. A concentration of hedge fund interest pushing the default means that the implications are inordinately concentrated between these specific vulture funds and the government, and people, of Venezuela. For currencies like the dollar or the euro, this simply will not register against preoccupations with concerns such as monetary policy and political risk.

Robert Kelly

Foreigner capital will leave and vulture funds will close in. Barter will start to replace currency in rural Venezuela.

The Social Impact

Thomas Hale

Associate Professor of Global Public Policy, University of Oxford

It would marginally deepen the already severe societal effects of the downturn. The country is already in a serious crisis due to lack of public goods and a deterioration in basic security. Formally defaulting would have little additional effect because the country is already essentially in default de facto.

Robert Kelly

Professor of Political Science and Diplomacy, Pusan National University

There would be further turmoil and chaos, possibly spilling into the streets, depending on how severe the import cut-off is, and a rise in crime due to shortages.

John Kicklighter

Chief Currency Strategist, IG

The social climate in Venezuela is already extremely strained. It is possible to make worse, but it would be difficult.

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